Spiraling pension payouts pose threat
Retirement costs for public workers in some of California’s largest cities and dozens of others across the country are far outpacing inflation and will reach “critical mass” in a few years unless changes are made, Wall Street analysts are warning.
In two reports made public Wednesday, Moody’s Investors Service outlines retiree costs in 55 cities, including eight in California: Anaheim, Fresno, Long Beach, Los Angeles, Oakland, San Diego, San Francisco and San Jose.
Though pension expenses have risen significantly in recent years, the cost of providing healthcare benefits to retirees is going up even faster, the reports conclude. On average, they have risen 15% a year while inflation has hovered around 3%, the reports said.
The rising costs “could reach a critical mass” where they are eating into general funds used to run libraries, pave roads and provide education, said Moody’s, a credit rating agency.
Former state Assemblyman Keith Richman, a longtime pension reform advocate, said the reports back up what he has been saying for years.
“What Wall Street is doing is sounding the alarm again,” he said. “When they talk about these costs reaching a critical level where pensions are competing with current operations for funding, we ought to pay attention.”
Moody’s prepared the reports in response to market concerns about the effect of the growing pension debt, said Moody’s spokesman Richard Helgason.
In San Diego, pension officials face charges of conflict of interest, conspiracy and fraud for allowing the city to under-fund its pension system, which now has a deficit of at least $1 billion.
Fearful of another such debacle, investors want full disclosure of current and future funding obligations when deciding whether to invest in municipal bonds.
Later this year, governments will be required for the first time to report current and future healthcare costs, in addition to pension debt, in annual financial statements.
The new reporting standards are expected to provide a clearer picture of what has been promised to workers and how public entities intend to pay for them, said Douglas Benton, a Moody’s vice president based in Houston.
“There was not a lot of consistency in disclosure,” Benton said. “This makes a level playing field to discuss expenses and liabilities.”
The report on healthcare benefits for retirees shows that they rose an average of 15% a year over five years ending in 2005. Oakland had the largest annual average increase -- 45% -- of the 55 cities surveyed nationwide, the report said. Oakland’s annual payout for retiree healthcare rose to $2.6 million in 2005 from $600,000 in 1997, Moody’s reported.
As for pensions, Moody’s found that the funding ratio of pension trusts has steadily dropped since 1999. In a well-managed trust, the funding ratio should hover close to 100%, meaning there is enough money to cover all of its pension obligations.
In 1999, the median funding ratio of the 55 cities surveyed was 103%, an actuarial surplus that has since disappeared. By 2004, the funding ratio was 84%.
Dwight Burns, a Moody’s analyst, said state and local governments could prevent fiscal crises by taking steps to fully fund trusts.
Moody’s did not make recommendations, but pension reform advocates have suggested potential fixes such as reducing benefits for new hires and increasing employee contributions.
A bipartisan panel created by Gov. Arnold Schwarzenegger is expected to meet this year to come up with recommendations.
